Lets see if I can clear my head around this.
Suppose we have a firm A traded on the stock exchange. Firm A is rather unique. If you look at the past 10 years of data it has been growing at 10% per annum for the past 10 years.
10% growth is rather good compare to an average GDP growth of 3%.
In the past year, firm A, who has a market capitalization of 220 mil churns out 10 mil in profit.
Assume that such is this business that firm A is in, such that capex = depreciation, and as such profit = free cash flow. (For more of these terminology do go here and here)
So net profit = 10 mil , free cash flow = 10 mil.
Given the nature of such a predictable business we attribute a discount rate or required rate of return of 8%.
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